a) Price mechanism
a) functions of the price mechanism to allocate resources: rationing, incentive, signalling
price mechanism = when the interaction of supply and demand determines pricing and resource allocation
rationing = prices allocate scarce resources
high demand → high price → decreased demand → rationed resources only offered to those who can afford them
signalling = prices provide information on where producers should allocate resources
high demand → high price → allocate resources to meet demand
incentive = prices incentivise producers to allocate resources to profitable markets
high demand → high price → allocate resources to maximise profit